The Wall Street Journal recently highlighted a better method of analysing the impact of public sector pensions on state and local budgets. The results are ominous for government finances, the bond markets, and pretty much everything else:

Those wanting a glimpse into the future of our federal government’s finances should have a gander at Illinois. The state recently “resolved” a high-profile battle over its budget. Taxpayers were clubbed with a 32% hike in income taxes in an effort to shore up massive underfunding in public employee pensions, among other deficiencies.

But, predictably, it isn’t working. People are leaving the state in droves.

Despite what I thought were persuasive articles over the years (here, here and here, for example), corn ethanol and other biofuel mandates remain embedded in US law. As we have learned, once a government program is created, it becomes virtually impossible to eliminate, revise or even trim fat from it.

This year, it looked like this “rule of perpetuity” might finally change. The Trump-Pruitt Environmental Protection Agency proposed to use its “waiver authority” to reduce its 2018 biodiesel requirement by 15% (315 million gallons) and (possibly) lower the 2019 total down to the 1-billion-gallon minimum mandated by Congress. The proposed action would not affect corn or other ethanol production and blending requirements, despite growing problems with incorporating more ethanol into gasoline.

The credit rating agency attributed the higher adjusted net pension liability for the 50 states to underperforming investment returns, low interest rates and insufficient contributions to retirement systems for government workers.

The train wreck that is the state of Illinois has generated a lot of questions lately, including “Will its government ever pass a budget?”, “Will it ever pay its overdue bills?”, and “Is it possible for a state to go bankrupt?”

Looks like we’re about to get some answers to these questions, along with one more: “What happens to the financial markets when people finally realize that Illinois is far from the only impending bankruptcy?”

Today’s Wall Street Journal has an anecdote-filled article illustrating what certainly looks like a case of terminal financial mismanagement (How Bad Is the Crisis in Illinois? It Has $14.6 Billion in Unpaid Bills):

There are signs of Illinois bankruptcy everywhere. The gridlock in the state legislature may be a cause of it, but it is more significant as a symptom. The Democrat-dominated system has broken down because there is no money left. The usual compromises don’t work anymore because they cost too much.

“Unfortunately, investors seem to have concluded that central bank easing is omnipotent, despite the fact that the Fed eased persistently and aggressively, to no effect, through the entire course of 2000-2002 and 2007-2009 market collapses.”

“Central bank policies for low-and-negative-interest rates are artificially driving up asset prices while creating little growth in the real economy and punishing individual savers, banks, and insurance companies, according to Gross.”